The crowdfunding debate we had to have

In the hands of bureaucrats, the press release can be a rather blunt instrument. ASIC’s missive on crowdfunding is a perfect example.

To be fair, the release was long and fairly detailed, a sharp contrast to ASIC’s typically to-the-point communications. And the tone taken was as gentle as ASIC gets.

“Crowdfunding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by ASIC,” commissioner Greg Tanzer said.

‘However, depending on the particular crowdfunding arrangement, ASIC’s view is that some types of crowdfunding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document. These activities are regulated by ASIC under the Corporations Act and ASIC Act and may impose legal obligations on operators of crowdfunding sites and on people using those sites to raise funds.

‘We want to make sure anyone involved in crowdfunding is aware of these obligations to ensure they operate within the law and don’t potentially expose themselves to penalties under the Corporations Act or ASIC Act.”

A warning, but a friendly one. Of course, the friendship does tend to stretch when ASIC spells out what it sees as potential penalties – and let’s be clear, these are very much maximum penalties – that could be associated with crowdfunding breaches.

Just mentioning maximum penalties of five years’ jail and fines of up to $22,000 tends to make even a friendly warning not so friendly. It’s no surprise that industry leaders in this area and indeed many SmartCompany readers were unimpressed with ASIC’s approach.

You can understand the frustration. In a period when funding for SMEs and particularly start-ups is constrained, crowdfunding has provided a viable alternative for many entrepreneurs.

Platforms such as Kickstarter in the United States and Pozible in Australia have allowed many entrepreneurs to push their idea further down the road towards commercialisation.

From the tech sector to the arts sector, right through to the media sector and the charity sector, crowdfunding is emerging as a legitimate funding model at a time when traditional funding models aren’t working as well as they used to.

As those in the sector will tell you, the vast, vast majority of projects on crowdfunding platforms offer supporters non-monetary rewards.

In the case of a project that involves a product, the reward will be the product itself – that is, supporters are essentially pre-purchasing the product.

In the case of a project that involves an event, supporters might get rewarded with a ticket.

In the case of many other projects, supporters get a warm fuzzy feeling – that is, the funding is basically a straight donation.

To be fair to ASIC, those aren’t the projects it is worried about. As it points out, these projects would be covered by Australia’s consumer law regime, so consumers who feel the promoter of a project has made a misleading or deceptive claim could appeal to the ACCC or their local fair trading office.

The projects that have the watchdog nervous are those where supporters are promised a share of the profits generated or some sort of income stream.

ASIC argues that projects that do this could be seen to be offering a financial product and/or running a managed investment scheme and would therefore be subject to regulation under the Corporations Act.

For example, someone offering a financial product would be required to hold an Australian Financial Services licence and may have to produce a product disclosure statement for “investors” in the project.

Failing to hold an AFS licence carries a maximum penalty of two years’ jail in the traditional funding world. Failing to register a managed investment scheme carries a maximum penalty of up to five years’ jail.

At the heart of this, ASIC is hammering home to the crowdfunding sector that if you want to treat supporters as investors, then the investors need to be afforded all the protections that ordinary investors receives.

I think it’s also important to note that ASIC’s work in this area is part of a global move by regulators to examine crowdfunding.

In the US, the Securities and Exchange Commission has strict rules that mean projects on Kickstarter cannot offer supporters shares in a company or profit shares.

However, a new piece of regulatory regime called the JOBS Act, which was enacted a few months ago, will allow for the crowdfunding platforms to facilitate projects that sell actual shares in a company or organisation, or shares in the profits generated – under strict rules, of course.

While Kickstarter has said it won’t be allowing projects to offer equity, no doubt other platforms will emerge. Crowdcube in Britain is the poster child for the equity model.

Against a backdrop of emerging funding models and emerging regulation, we shouldn’t be too hard on ASIC. Clearly the watchdog is not trying to stifle innovation or shut down the sector – what it wants to ensure is that investors are protected as much as possible and the sector continues to think about and debate these issues.

Dropping hints about five-year jail terms might not be best way to encourage debate, but it has got us all talking.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.


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